Ukraine, the Economy and the Supply Chain

So there is war in Europe, as Russia invades Ukraine.

There are all manner of scenarios as to how this plays out, from slightly optimistic to very pessimistic. But in this highly dynamic environment, I think we can make some educated guesses on the impacts of the invasion on the economy and supply chain.

Let's start with oil prices, which Thursday rose not all that much, up $2.62 or 2.67% for a barrel of Brent crude (the European benchmark), reaching a price of $99.43.

It was of course already at a high price before yesterday's modest jump, but some of the sharp rise in oil prices in February likely was the result of traders pricing in an invasion scenario.

Do oil prices head still higher from here? Rising oil costs obviously lead directly to higher gas and diesel prices, with average US prices for a gallon of gas hitting $3.50+ this week, and over $4.00 for diesel - levels that surely will soon have an impact on the economy and the prices of goods. I am seeing some predictions for $120 oil.

Oil is also used as feedstock in plastics, chemicals, fertilizer and many other products, meaning there is cost/price pressure from that side as well.

The possibility that oil prices move even higher comes after  the US already being in the midst of raging inflation, which in January hit a 40-year high of 7.5% year-over-year in the US.

It could get worse. Writing this week in The Atlantic magazine, David Frum says that with already high oil and natural gas prices, Russia could reduce its supply of both to world markets.

"Any Russian retreat from world oil markets will jolt prices in ways that will be felt at gas pumps around the world," Frum writes, adding "Russia's retaliation could hurt natural-gas consumers [like much of Europe] even worse," because natural gas lacks the same type of well-functioning markets that oil enjoys." In Europe, the supply is also primarily moved by pipelines - most of which are connected to Russia.

But fossil fuels are hardly the only commodities the Russian Ukraine action might impact.

For example, Ukraine is considered the "breadbasket of Europe," and the invasion would result in the food supply chain being seriously disrupted. Prices for wheat, barley and corn might jump. Together, Russia and Ukraine account for roughly 29% of the global wheat export market.

Ditto with some metals such a copper, nickel and titanium and certain minerals.

Even though the US imports very little directly from Russia or Ukraine, energy, metals and agricultural products generally trade on global markets, so rising prices impact all buyers.

This week, the New York Times said there are other risks to the economy from this situation, writing that "Global unrest could also spook American consumers, prompting them to cut back on spending and other economic activity." That on top of the impact of inflation on consumer buying - not much seen yet, but certain to come.

There is also the risk that a return to somewhat normal times after two years of pandemic-driven supply chain disruptions, wild price swings and more could be delayed still longer, prolonging these strange supply chain times for who knows how long.

One potential bright spot for the US: the conflict may cause investors and others to move into the perceived safety of the US dollar, increasing its value. That would somewhat mute the impact of rising prices for commodities and other imported goods - but at the price having the opposite effect on US exports.

Finally, one wild card: if pushed, will Russia launch cyber-attacks on the US, perhaps targeting sectors such as the electric grid and banking? Such attacks could quickly bring the US economy to its knees.

I am not an economist, but to me it's all just more risk, more disruption and maybe even a return of stagflation - a weak economy with high inflation.

On a positive note, early in the day Thursday, the Dow Jones Industrial Average was down a big 700 points -but finished the day on the upside, rising 90 points. Let's hope the stock traders' optimism is the right view.

Here is the take on all this from the UK's excellent The Economist magazine: "The immediate global implications will be higher inflation, lower growth and some disruption to financial markets as deeper sanctions take hold. The longer-term fallout will be a further debilitation of the system of globalized supply chains and integrated financial markets that has dominated the world economy since the Soviet Union collapsed in 1991.

We'll learn something more every day.

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